159 Pa. 112 | Pa. | 1893
Opinion by
We think the decree of the learned court below in this case was entirely correct. We do not see that there is anything either in the resolution of the stockholders at the meeting held October 18th, 1883, authorizing the issue of preferred stock, or in the certificates issued to the holders of preferred stock, which takes away from the directors, or impairs, the discretion which they must exercise in the declaration of dividends. According to the language of the certificates, “ The holders of preferred stock of said company are entitled to dividends out of the net earnings of each year, when declared by the board of directors, to the extent of twelve per centum of the par value of said stock before the payment of dividends to the holders of common stock, but the dividends on the preferred stock are not cumulative.” By this language the preferred stockholders are entitled to have their dividends “ when declared by the board of directors,” and such declaration by the directors is antecedent to the right to have them. The resolution of the stockholders is the mere general expression of the authority given to the directors to issue preferred stock, prescribing the
As a matter of course the directors must determine not only the amount of all dividends to be declared, but the circumstances in which they will or may declare them. They are cer- < tainly not entitled to refuse them either arbitrarily, or when, in view of all the considerations which should properly affect the question, they ought to grant them. Their action, or refusal to act, is undoubtedly subject to review by the courts, but within the regulated limits of their authority as suggested they have the exclusive control of the whole matter, and their action is binding upon the stockholders.
In a given case, therefore, it is only necessary to inquire what were the reasons which controlled their action. In the present case, which was heard upon the bill and answer only, they allege that, “In or prior to the year 1892, the said company decided to enlarge, extend and increase its works and business, and during the said year, in so doing, made large expenditures and incurred large indebtedness. No dividends have been declared for the said year 1892 upon the preferred or common stock, solely for the reason that in the judgment of the board of directors of said company it was, and is, expedient and necessary to apply all the earnings of the company upon the company’s indebtedness incurred in said enlargement, extension and increase of its works and business, and that said earnings have been so applied.”
In the fourth paragraph of the bill it was alleged that the liabilities of the company aside from its capital stock amount to $1,853,000, while without its investment account its assets, consisting of material, stock on hand, and outstanding accounts, amount to the sum of $789,000. This statement is admitted in the answer to be correct. Of course such assets are not cash
In the other case above mentioned, New York, Lake Erie & Western R. R. v. Nickals, a somewhat similar state of facts was presented. The property and franchises of the company had been sold, and a reorganization effected, under which new preferred stock was to be issued in exchange for old preferred stock, on which non-cumulative dividends were to be paid at the rate of six per cent out of the profits of each year, in preference to the payment of any dividends on the common stock. New common stock was to be issued in exchange for old common stock. There were other details of the agreement for reorganization which are not material. The company was reorganized and carried on its operations. In the year 1880 the report of the directors showed that a profit of 11,790,620.71 had been made on the business of the year, after deducting the payments made for interest on the funded debt, rentals of leased lines and other charges, but the whole amount of the resulting profit, together with a large additional sum, had been expended in the building of a double track, erection of buildings, providing additional equipments, acquiring and constructing docks at Buffalo, and making other improvements to the road and property. In consequence of these expenditures no dividend was declared on either the preferred or common stock, and a preferred stockholder filed a bill to recover his dividends, claiming that the company had no right to expend its earnings in that way to the prejudice of the preferred stockholders. The lower court allowed a recovery, but the Supreme Court reversed the decree, holding that there could be no recovery, on the ground that there was no abuse of discretion on the part of the directors ,in refusing to pay the dividend, or in the management of the affairs of the company by which the expenditures were made.
Reviewing further the contention of the plaintiff, and the power of the directors over the earnings and their expenditure, and the agreement of reconstruction, the court held that the preferred stockholder was bound by the action of the directors, and was not entitled to any dividend because none was declared, and there was nothing to impugn the good faith of their action.
These rulings and principles and reasoning announced, are quite applicable to the present case, and, as we think, dispose, of it. The directors are far better able to judge what is the best policy, and for the best interests of all, in determining how far the earnings ought to be applied to the reduction of indebtedness, rather than to the payment of dividends. As a rule it is always a measure of sound policjr to discharge corporate indebtedness rather than to divide the earnings among the stockholders, allowing the indebtedness to remain. The stockholders are almost certain to obtain larger advantages and returns in the future, especially where as here the property, works and business were so greatly enlarged by the expenditures in question. There is not the least pretence of any bad faith on the part of the directors in making the expenditures and withholding the dividends, and we think the stockholders are bound by their action.
Decree affirmed at the cost of the appellant.